Research Dept. News
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Monthly Report, num 312 - April 2008
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International Review - Japan
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Japan: the weakness of a long growth period
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Japan continues gradual growth but consumers form no part of it.
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The GDP of Japan’s economy grew by 1.7% year-on-year in the fourth quarter of 2007, thanks to the strength of investment in capital goods, public consumption and a rise in inventories. Excessive dependence on the foreign sector continues, along with the weakness of private consumption. This leaves the economy in a state of weakness that is worsening if we take into account that Japan does not have any shock-absorbers in monetary or fiscal policy seeing that the public debt is nearly 160% of GDP and interest rates are at a low 0.5%, which offers practically no possibilities for rate cuts.
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Dependence on foreign sector and heavy public sector debt present risks.
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Japan’s recovery has been going on for 6 years but it has two clear weaknesses. First, the level of growth has been extremely low. According to the latest revision issued by the International Monetary Fund on the weight of various countries in the whole world economy, Japan continues to lose importance. This should not be serious if we consider the enormous progress of economies like China and India. The problem comes when we compare it with other rich areas. Between 1997 and 2007 the Japanese economy went from being 46% to 41% of the total economy of the Euro Area and from 37% to 31% of the US economy. If this calculation is made in current terms, Japan’s deflation means that the decreases are even greater.
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Corporate profits concentrated in large companies.
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Secondly, the benefits of growth are not turning into wage increases in spite of the fact that the unemployment rate continues at very low levels because of dropping population. In January, the rate was 3.8% of the labour force. The reason could lie in the dual structure of Japanese companies. While the large companies did their homework in the Nineties and are now in good shape, the small and medium companies (which make up 70% of all employment) still have elements of inefficiency. As a result, with wages dropping 0.4% year-on-year in the last quarter of 2007, it is not surprising that private consumption continues weak. Consumer confidence ended the year at the 38.9 points level and, in spite of a slight rise, retail sales were up by a slim 1.3% year-on-year in January. Car sales, while far from the highs in 2005, do not fall into this grim picture but are showing something of a recovery that it is hoped will continue.
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Industrial production and retail sales maintain low profile but investment recovering.
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On the supply side, industrial production was up 2.2% year-on-year in January, down from the 4.5% in 2006 and 2.9% in 2007. That same month, machinery orders, an early indicator of investment demand, rose by 18.9% year-on-year, thanks to a sharp rise in orders by the export industry, which represents 49.7% of the total, as against 40% at the end of 2003, which again shows the dependence on foreign demand.
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Prices up due to rise in oil but deflation still continues while exports depend on Asian growth.
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In the real estate market, housing starts in January showed signs of recovery with a reduction of the drop from 19.0% to 5.7% year-on-year. However, the market is not going along and sales dropped by 44.1% in the Tokyo area in February. Prices are also easing going from an increase of 9.2% to a slight growth of 3.2%. The January CPI rose by 0.7% year-on-year and the traditionally followed index excluding fresh foods rose by 0.8%. Nevertheless, publication of the underlying index (the general index excluding energy and foods) again showed a drop of 0.1% compared with the same period the year before. As a result, all appearance of an end to the period of deflation comes from abroad as import prices continue to rise because of energy and food. The good news was again to be seen in the trade balance which maintained its surplus in January thanks to the fact that exports to Asia compensated for lower demand from the United States.
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